PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BUTLER NATIONAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

As of October 31, 2020 and April 30, 2020

(in thousands except per share data) 

 

See accompanying notes to condensed consolidated financial statements (unaudited)

 

 

BUTLER NATIONAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED October 31, 2020 AND 2019

(in thousands, except per share data)

(unaudited)

 

 

 

See accompanying notes to condensed consolidated financial statements (unaudited)

 

 

 BUTLER NATIONAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE six months ended October 31, 2020 and 2019

(dollars in thousands)

(unaudited)

 

 

 

 

See accompanying notes to condensed consolidated financial statements (unaudited)

 

 

BUTLER NATIONAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE six months ended October 31, 2020 and 2019

(in thousands)

(unaudited) 

 

 

See accompanying notes to condensed consolidated financial statements (unaudited)

   

 

BUTLER NATIONAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(dollars in thousands, except per share data)

(unaudited)

 

 

 

 

 

 

 

    

 

 

 

 

 

 

ITEM 2.          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

THROUGHOUT THIS ITEM 2 ALL NON TABULAR FINANCIAL RESULTS ARE PRESENTED IN THOUSANDS OF U.S. DOLLARS EXCEPT WHERE MILLIONS OF DOLLARS IS INDICATED.

 

Forward-Looking Statements

 

Statements made in this report, other reports and proxy statements filed with the Securities and Exchange Commission, communications to stockholders, press releases, and oral statements made by representatives of the Company that are not historical in nature, or that state the Company or management intentions, hopes, beliefs, expectations or predictions of the future, may constitute "forward-looking statements" within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements can often be identified by the use of forward-looking terminology, such as "could," "should," "will," "intended," "continue," "believe," "may," "expect," "hope," "anticipate," "goal," "forecast," "plan," "guidance" or "estimate" or the negative of these words, variations thereof or similar expressions. Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties, and assumptions. It is important to note that any such performance and actual results, financial condition or business, could differ materially from those expressed in such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Item 1A (Risk Factors) of the Annual Report on Form 10-K for the fiscal year ended April 30, 2020, and elsewhere herein or in other reports filed with the SEC. Other unforeseen factors not identified herein could also have such an effect. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in future operating results, financial condition or business over time.

 

The forward-looking statements in this report are only predictions and actual events or results may differ materially. In evaluating such statements, a number of risks, uncertainties and other factors could cause actual results, performance, financial condition, cash flows, prospects and opportunities to differ materially from those expressed in, or implied by, the forward-looking statements. These risks, uncertainties and other factors include those set forth in Item 1A (Risk Factors) of the Annual Report on Form 10-K for the fiscal year ended April 30, 2020, including the following factors:

 

●

extensive regulation across our industries;

●

evolving government regulations and law;

●

the geographic location of our casino;

●

customer concentration risk;

●

risks associated with the potential acquisition of land at the Boot Hill Casino;

●

industrial business cycles;

●

market competition;

●

marketability restrictions of our common stock;

●

stock dilution caused by the annual employer match to our 401(k) plan;

●

the possibility of a reverse-stock split;

●

executive officers are family members;

	●	non-renewal of certain casino management contracts;
	●	changes in regulations of financial reporting;

●

fluctuating fuel and energy costs;

●

fixed-price contracts;

●

development, production, testing and marketing of new products;

●

the stability of credit markets;

●

cyber-security threats;

●

acts of terrorism and war;

●

inclement weather and natural disasters;

	●	pandemics or other national health crisis;
	●	loss of key personnel;

●

risks associated with international sales;

●

future acquisitions and investments;

●

change of control restrictions;

●

potential impairment losses;

●

extensive taxation;

 

Except as expressly required by the federal securities laws, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this report. Results of operations in any past period should not be considered indicative of the results to be expected for future periods. Fluctuations in operating results may also result in fluctuations in the price of the Company's common stock.

 

Investors should also be aware that while the Company, from time to time, communicates with securities analysts; it is against its policy to disclose any material non-public information or other confidential commercial information. Accordingly, shareholders should not assume that the Company agrees with any statement or report issued by any analyst irrespective of the content of the statement or report. Furthermore, the Company has a policy against issuing or confirming financial forecasts or projections issued by others. Thus, to the extent that reports issued by securities analysts contain any projections, forecasts or opinions, such reports are not the responsibility of Butler National Corporation.

   

 

Management Overview

 

Management is focused on increasing long-term shareholder value from increased cash generation, earnings growth, and prudently managing capital expenditures. We plan to do this by continuing to drive increased revenue from product and service innovations, strategic acquisitions, and targeted marketing programs.

 

We have two separate reporting segments: Aerospace Products and Professional Services. Aerospace Products and Professional Services do not share the same customers and suppliers and have substantially distinct businesses. The Aerospace Products operating segment provides products and services in the aerospace industry. Companies in Aerospace Products derive their revenue from system design, engineering, manufacturing, integration, installation, repairing, overhauling, servicing and distribution of aerostructures, avionics, aircraft components, accessories, subassemblies and systems. The Professional Services operating segment provides services in the gaming industry. Professional Services companies manage a gaming and entertainment facility and provide architectural and engineering services. These reporting segments operate through various subsidiaries and affiliates listed in the Company’s fiscal year 2020 Annual Report on Form 10-K.

 

Aerospace Products. The Aerospace Products segment includes the manufacture, sale and service of electronic equipment and systems and technologies to enhance and support products related to aircraft. Additionally, we also operate several Federal Aviation Administration (the "FAA") Repair Stations. Companies in Aerospace Products concentrate on Learjet, Beechcraft King Air, Cessna turbine engine, Cessna multi-engine piston and Dassault Falcon 20 aircraft. Specifically, the design, distribution and support for products for older aircraft, or “Classic” aircraft are areas of focus for companies in Aerospace Products.

 

Products. The products that the companies within this group design, engineer, manufacture, integrate, install, repair and service include:

 

●	Aerial surveillance products		●	GARMIN GTN Global Position System Navigator with Communication Transceiver
●	Aerodynamic enhancement products		●	J.E.T autopilot products
●	Airspeed and altimeter systems		●	Electrical systems and switching equipment
●	Avcon Fins		●	Noise suppression systems
●	ADS-B (transponder) systems		●	Rate gyroscopes
●	Conversion of passenger configurations to cargo		●	Replacement vertical accelerometers
●	Cargo/sensor carrying pods		●	Provisions for external stores
●	Electronic navigation instruments, radios and transponders		●	Attitude heading reference systems

 

Modifications. The companies in Aerospace Products have authority pursuant to Federal Aviation Administration Supplemental Type Certificates (“STCs”) and Parts Manufacturer Approval (“PMA”), to build required parts and subassemblies and to make applicable installations. Companies in Aerospace Products perform modifications in the aviation industry including:

 

●	Aerial photograph capabilities		●	Extended tip fuel tanks
●	Aerodynamic improvements		●	Radar systems
●	Avionics systems		●	ISR – Intelligence Surveillance Reconnaissance
●	Cargo doors		●	Special mission modifications
●	Conversion from passenger to freighter configuration		●	Stability enhancements
●	Extended doors		●	Traffic collision avoidance systems

 

Special Mission Electronics. We supply defense-related, commercial off-the-shelf products to various commercial entities and government agencies and subcontractors in order to update or extend the useful life of aircraft with older components and technology. These products include:

 

●	Cabling		●	HangFire Override Modules
●	Electronic control systems		●	Test equipment
●	Gun Control Units for Apache and Blackhawk helicopters		●	Gun Control Units for land and sea based military vehicles

 

Professional Services. The Professional Services segment includes the management of a gaming facility and related dining and entertainment facilities in Dodge City, Kansas. Boot Hill Casino and Resort features approximately 645 slot machines and 20 table games. Due to COVID-19, Boot Hill Casino and Resort currently has 412 slot machines and 16 table games. Companies in Professional Services also provide licensed architectural services, including commercial and industrial building design, and engineering services.

 

Boot Hill. Butler National Service Corporation (“BNSC”), via BHCMC, LLC (“BHCMC”), a company in Professional Services, has managed The Boot Hill Casino and Resort in Dodge City, Kansas (“Boot Hill”) since 2009 pursuant to the Lottery Gaming Facility Management Contract, by and among BNSC, BHCMC and the Kansas Lottery, originally dated December 8, 2009, as subsequently amended (“Boot Hill Agreement”). As required by Kansas law, all games, gaming equipment and gaming operations at Boot Hill are owned and operated by the Kansas Lottery.

 

Architectural and Engineering Services. Companies in Professional Services provide licensed architectural, including commercial and industrial building design, and engineering services.

 

COVID-19 Overview

The pandemic caused by the disease COVID-19 was first reported in Wuhan, China in December 2019 and has since spread throughout the world. Financial markets have been volatile in 2020, primarily due to uncertainty with respect to the severity and duration of the pandemic.

 

The pandemic has resulted in federal, state and local governments around the world implementing increasingly stringent measures to help control the spread of the virus, including quarantines, “shelter in place” and “stay at home” orders, travel restrictions or bans, business curtailments, school closures, and other protective measures.

 

Our aerospace segment qualified as “essential” under applicable federal guidance and state orders. The facilities have continued operations. We are enforcing social distancing and enhanced health, safety and sanitization measures in accordance with guidelines from the Center for Disease Control (the “CDC”).

We have also implemented necessary procedures and support to enable a significant portion of our Olathe headquarters personnel to work remotely. 

Our professional services operations at the Boot Hill Casino & Resort was forced to close from March 18, 2020 thru May 21, 2020. The casino reopened to the public on May 22, with reduced hours to allow for extra time for cleaning and sanitizing in accordance with CDC guidelines and a limited number of games and food
offerings. While we have returned to normal hours, we are continuing to enforce social distancing measures throughout the casino. Since reopening the Boot Hill Casino & Resort we have experienced lower customer headcount, which has been partially off-set by a larger net revenue per customer. We are experiencing, and expect to continue experiencing, lower demand for our professional services and increased costs and other challenges related to COVID-19 that adversely affects our business.

 

BHCMC, LLC, a subsidiary in the professional services segment, received a loan in the principal amount of $2.0 million (the “SBA Loan”) under the Paycheck Protection Program (“PPP”), which was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The intent and purpose of the PPP is to support companies during the COVID-19 pandemic by providing funds for certain specified business expenses, with a focus on payroll. We have used the proceeds from the SBA Loan to maintain our payroll and retain casino staff. With the assistance of the SBA Loan, we believe we have sufficient liquidity at this time to maintain our business operations during this difficult time.

 

The COVID-19 pandemic impacted our business operations and financial results beginning in the fourth quarter of fiscal 2020 and continues to impact us in fiscal 2021. We face numerous uncertainties in estimating the direct and indirect effects on our present and future business operations, financial condition, results of operations, and liquidity. Due to several rapidly changing variables related to the COVID-19 pandemic, we cannot reasonably estimate future economic trends and the timing of when stability will return.

 

Results Overview

 

The six months ended October 31, 2020 revenue decreased 21% to $29.0 million compared to $36.5 million in the six months ended October 31, 2019. In the six months ended October 31, 2020 the professional services revenue was $13.0 million compared to $16.2 million in the six months ended October 31, 2019, a decrease of 20%. In the six months ended October 31, 2020 the Aerospace Products revenue was $16.0 million compared to $20.2 million in the six months ended October 31, 2019, a decrease of 21%.

 

The six months ended October 31, 2020 net income decreased to $306 compared to a net income of $4.3 million in the six months ended October 31, 2019.  The six months ended October 31, 2020, operating income decreased to $1.8 million from an operating income of $7.7 million in the six months ended October 31, 2019.

RESULTS OF OPERATIONS

 

six months ended October 31, 2020 COMPARED TO six months ended October 31, 2019

 

(dollars in thousands)		Six Months Ended October 31, 2020				Percent of Total Revenue				Six Months Ended October 31, 2019				Percent of Total Revenue				Percent Change 2019-2020
Revenue:
Professional Services		$	13,001				45	%		$	16,223				45	%			-20	%
Aerospace Products			15,960				55	%			20,230				55	%			-21	%
Total revenue			28,961				100	%			36,453				100	%			-21	%
Costs and expenses:
Costs of Professional Services			6,828				24	%			7,856				21	%			-13	%
Cost of Aerospace Products			11,788				41	%			11,532				32	%			2	%
Marketing and advertising			1,845				6	%			2,139				6	%			-14	%
Employee benefits			1,151				4	%			1,073				3	%			7	%
Depreciation and amortization			2,644				9	%			2,515				7	%			5	%
General, administrative and other			2,890				10	%			3,590				10	%			-19	%
Total costs and expenses			27,146				94	%			28,705				79	%			-5	%
Operating income		$	1,815				6	%		$	7,748				21	%			-77	%

 

 

Revenue:

 

Revenue decreased 21% to $29.0 million in the six months ended October 31, 2020, compared to $36.5 million in the six months ended October 31, 2019. See "Operations by Segment" below for a discussion of the primary reasons for the decrease in revenue.

 

●

Professional Services derives its revenue from (a) professional management services in the gaming industry through Butler National Service Corporation ("BNSC") and BHCMC, LLC ("BHCMC"), and (b) professional architectural, engineering and management support services. Revenue from Professional Services decreased 20% for the six months to $13.0 million at October 31, 2020 compared to $16.2 million in the six months ended October 31, 2019.

 

●

Aerospace Products derives its revenue by designing, engineering, manufacturing, installing, servicing and repairing products for classic and current production aircraft. Aerospace Products revenue decreased 21% for the six months to $16.0 million at October 31, 2020 compared to $20.2 million in the  six months ended October 31, 2019.

 

Costs and expenses:

 

Costs and expenses related to Professional Services and Aerospace Products include the cost of engineering, labor, materials, equipment utilization, control systems, security and occupancy. Costs and expenses decreased 5% in the six months ended October 31, 2020 to $27.1 million compared to $28.7 million in the six months ended October 31, 2019. Costs and expenses were 94% of total revenue in the six months ended October 31, 2020, as compared to 79% of total revenue in the six months ended October 31, 2019.

  

Costs of Professional Services decreased 13% in the six months ended October 31, 2020 to $6.8 million compared to $7.9 million in the six months ended October 31, 2019. Costs were 24% of total revenue in the six months ended October 31, 2020, as compared to 21% of total revenue in the six months ended October 31, 2019.

 

Costs of Aerospace Products increased 2% in the six months ended October 31, 2020 to $11.8 million compared to $11.5 million for the six months ended October 31, 2019. Costs were 41% of total revenue in the six months ended October 31, 2020, as compared to 32% of total revenue in the six months ended October 31, 2019.

 

Marketing and advertising expenses decreased by 14% in the six months ended October 31, 2020, to $1.8 million compared to $2.1 million in the six months ended October 31, 2019. Expenses were 6% of total revenue in the six months ended October 31, 2020, as compared to 6% of total revenue in the six months ended October 31, 2019. Marketing and advertising expenses include advertising, sales and marketing labor, gaming development costs, and casino and product promotions.

  

Employee benefits expenses as a percent of total revenue was 4% in the six months ended October 31, 2020, compared to 3% in the six months ended October 31, 2019. These expenses increased to $1.2 million in the six months ended October 31, 2020, from $1.1 million in the six months ended October 31, 2019. These expenses include the employers' share of all federal, state and local taxes, paid time off for vacation, holidays and illness, employee health and life insurance programs and employer matching contributions to retirement plans.

  

Depreciation and amortization expenses as a percent of total revenue was 9% in the six months ended October 31, 2020, compared to 7% in the six months ended October 31, 2019. These expenses increased 5% to $2.6 million in the six months ended October 31, 2020, from $2.5 million in the six months ended October 31, 2019. These expenses include depreciation related to owned assets being depreciated over various useful lives and amortization of intangible items including the Kansas privilege fee related to the Boot Hill Casino being expensed over the term of the gaming contract with the State of Kansas. BHCMC, LLC depreciation and amortization expense for the six months ended October 31, 2020 was $1.9 million compared to $1.9 million in the six months ended October 31, 2019.

 

General, administrative and other expenses as a percent of total revenue was 10% in the six months ended October 31, 2020, compared to 10% in the six months ended October 31, 2019. These expenses decreased 19% to $2.9 million in the six months ended October 31, 2020, from $3.6 million in the six months ended October 31, 2019.

 

Other income (expense):

 

Interest expense and other income were ($1.7) million in the six months ended October 31, 2020, compared with interest expense and other income of ($1.7) million in the six months ended October 31, 2019.  Interest related to obligations of BHCMC, LLC was ($1.5) million in the six months ended October 31, 2020 compared to ($2.0) million in the six months ended October 31, 2019.

 

 

Operations by Segment

 

We have two operating segments, Professional Services and Aerospace Products. The Professional Services segment includes revenue contributions and expenditures associated with casino management services and professional architectural, engineering and management support services. Aerospace Products derives its revenue by designing, engineering, manufacturing, installing, servicing and repairing products for classic and current production aircraft.

 

The following table presents a summary of our operating segment information for the six months ended October 31, 2020 and October 31, 2019:

 

(dollars in thousands)		Six Months Ended October 31, 2020				Percent of Total Revenue				Six Months Ended October 31, 2019				Percent of Total Revenue				Percent Change 2019-2020
Professional Services
Revenue
Boot Hill Casino		$	12,863				99	%		$	16,113				99	%			-20	%
Management/Professional Services			138				1	%			110				1	%			25	%
Revenue			13,001				100	%			16,223				100	%			-20	%
Costs of Professional Services			6,828				53	%			7,856				48	%			-13	%
Expenses			5,446				41	%			5,928				37	%			-8	%
Total costs and expenses			12,274				94	%			13,784				85	%			-11	%
Professional Services operating income before noncontrolling interest in BHCMC, LLC		$	727				6	%		$	2,439				15	%			-70	%

  

(dollars in thousands)		Six Months Ended October 31, 2020				Percent of Total Revenue				Six Months Ended October 31, 2019				Percent of Total Revenue				Percent Change 2019-2020
Aerospace Products
Revenue		$	15,960				100	%		$	20,230				100	%			-21	%
Costs of Aerospace Products			11,788				74	%			11,532				57	%			2	%
Expenses			3,084				19	%			3,389				17	%			-9	%
Total costs and expenses			14,872				93	%			14,921				74	%			0	%
Aerospace Products operating income		$	1,088				7	%		$	5,309				26	%			-80	%

  

Professional Services

 

●

Revenue from Professional Services decreased 20% for the six months ended October 31, 2020 to $13.0 million compared to $16.2 million for the six months ended October 31, 2019. The decrease resulted from Boot Hill Casino & Resort being forced to close from March 18, 2020 thru May 21, 2020 due to COVID-19. In the six months ended October 31, 2020 Boot Hill Casino received gross receipts for the State of Kansas of $17.1 million compared to $20.5 million for the six months ended October 31, 2019. Mandated fees, taxes and distributions reduced gross receipts by $5.5 million resulting in gaming revenue of $11.6 million for the six months ended October 31, 2020, compared to a reduction to gross receipts of $6.5 million resulting in gaming revenue of $14.0 million for the six months ended October 31, 2019.  Non-gaming revenue at Boot Hill Casino decreased to $1.3 million for the six months ended October 31, 2020, compared to $2.1 million for the six months ended October 31, 2019. The remaining management and Professional Services revenue includes professional management services in the gaming industry, and licensed architectural services.  Professional Services revenue excluding Boot Hill Casino increased 25% to $138 for the six months ended October 31, 2020, compared to $110 for the six months ended October 31, 2019.

   

●

Costs of Professional Services decreased in the six months ended October 31, 2020 to $6.8 million compared to $7.9 million in the six months ended October 31, 2019. Costs were 53% of segment total revenue in the six months ended October 31, 2020, as compared to 48% of segment total revenue in the six months ended October 31, 2019.

  

●

Expenses decreased 8% in the six months ended October 31, 2020 to $5.4 million compared to $5.9 million in the six months ended October 31, 2019. Expenses were 41% of segment total revenue in the six months ended October 31, 2020, as compared to 37% of segment total revenue in the six months ended October 31, 2019.

  

Aerospace Products

  

●

Revenue decreased 21% to $16.0 million in the six months ended October 31, 2020, compared to $20.2 million in the six months ended October 31, 2019. The decrease in revenue is primarily due to a decrease in avionics business of $5.6 million and an increase in aircraft modification business of $1.3 million. We have invested in the development of several STCs. These STCs are state of the art avionics that we market both domestically and internationally.

●

Costs of Aerospace Products increased by 2% in the six months ended October 31, 2020 to $11.8 million compared to $11.5 million for the six months ended October 31, 2019.  Costs were 74% of segment total revenue in the six months ended October 31, 2020, as compared to 57% of segment total revenue in the six months ended October 31, 2019.

 

●

Expenses decreased 9% in the six months ended October 31, 2020 to $3.1 million compared to $3.4 million in the six months ended October 31, 2019.  Expenses were 19% of segment total revenue in the six months ended October 31, 2020, as compared to 17% of segment total revenue in the six months ended October 31, 2019.

  

 

SECOND QUARTER FISCAL 2020 COMPARED TO SECOND QUARTER FISCAL 2020

 

(dollars in thousands)		Three Months Ended October 31, 2020				Percent of Total Revenue				Three Months Ended October 31, 2019				Percent of Total Revenue				Percent Change 2019-2020
Revenue:
Professional Services		$	7,648				48	%		$	8,107				42	%			-6	%
Aerospace Products			8,324				52	%			11,330				58	%			-27	%
Total revenue			15,972				100	%			19,437				100	%			-18	%
Costs and expenses:
Costs of Professional Services			3,418				21	%			4,006				21	%			-15	%
Cost of Aerospace Products			6,687				42	%			6,563				34	%			2	%
Marketing and advertising			893				6	%			1,035				5	%			-14	%
Employee benefits			566				3	%			526				3	%			8	%
Depreciation and amortization			1,338				8	%			1,276				6	%			5	%
General, administrative and other			1,383				9	%			1,804				9	%			-23	%
Total costs and expenses			14,285				89	%			15,210				78	%			-6	%
Operating income		$	1,687				11	%		$	4,227				22	%			-60	%

 

Revenue:

 

Revenue decreased 18% to $16.0 million in the three months ended October 31, 2020, compared to $19.4 million in the three months ended October 31, 2019. See "Operations by Segment" below for a discussion of the primary reasons for the decrease in revenue.

 

●

Professional Services derives its revenue from (a) professional management services in the gaming industry through Butler National Service Corporation ("BNSC") and BHCMC, LLC ("BHCMC"), and (b) professional architectural, engineering and management support services. Revenue from Professional Services decreased 6% for the three months to $7.6 million at October 31, 2020 compared to $8.1 million at October 31, 2019.

 

●

Aerospace Products derives its revenue by designing, engineering, manufacturing, installing, servicing and repairing products for classic and current production aircraft. Aerospace Products revenue decreased 27% for the three months to $8.3 million at October 31, 2020 compared to $11.3 million at October 31, 2019.

 

Costs and expenses:

 

Costs and expenses related to Professional Services and Aerospace Products include the cost of engineering, labor, materials, equipment utilization, control systems, security and occupancy. Costs and expenses decreased 6% in the three months ended October 31, 2020 to $14.3 million compared to $15.2 million in the three months ended October 31, 2019. Costs and expenses were 89% of total revenue in the three months ended October 31, 2020, as compared to 78% of total revenue in the three months ended October 31, 2019.

 

Costs of Professional Services decreased 15% in the three months ended October 31, 2020 to $3.4 million compared to $4.0 million in the three months ended October 31, 2019. Costs were 21% of total revenue in the three months ended October 31, 2020, as compared to 21% of total revenue in the three months ended October 31, 2019.

 

Costs of Aerospace Products increased 2% in the three months ended October 31, 2020 to $6.7 million compared to $6.6 million for the three months ended October 31, 2019. Costs were 42% of total revenue in the three months ended October 31, 2020, as compared to 34% of total revenue in the three months ended October 31, 2019.

 

 

Marketing and advertising expenses decreased 14% in the three months ended October 31, 2020, to $893 compared to $1.0 million in the three months ended October 31, 2019. Expenses were 6% of total revenue in the three months ended October 31, 2020, as compared to 5% of total revenue in the three months ended October 31, 2019. Marketing and advertising expenses include advertising, sales and marketing labor, gaming development costs, and casino and product promotions.

 

Employee benefits expenses as a percent of total revenue was 3% in the three months ended October 31, 2020, compared to 3% in the three months ended October 31, 2019. These expenses increased 8% to $566 in the three months ended October 31, 2020, from $526 in the three months ended October 31, 2019. These expenses include the employers' share of all federal, state and local taxes, paid time off for vacation, holidays and illness, employee health and life insurance programs and employer matching contributions to retirement plans.

 

Depreciation and amortization expenses as a percent of total revenue was 8% in the three months ended October 31, 2020, compared to 6% in the three months ended October 31, 2019. These expenses increased 5% to $1.3 million in the three months ended October 31, 2020 from $1.3 million in the three months ended October 31, 2019. These expenses include depreciation related to owned assets being depreciated over various useful lives and amortization of intangible items including the Kansas privilege fee related to the Boot Hill Casino being expensed over the term of the gaming contract with the State of Kansas. BHCMC, LLC depreciation and amortization expense for the three months ended October 31, 2020 was $954 compared to $935 in the three months ended October 31, 2019.

 

General, administrative and other expenses as a percent of total revenue was 9% in the three months ended October 31, 2020, compared to 9% in the three months ended October 31, 2019. These expenses decreased 23% to $1.4 million in the three months ended October 31, 2020, from $1.8 million in the three months ended October 31, 2019.

 

Other expense:

 

Interest expense was $1.1 million in the three months ended October 31, 2020, compared with interest expense of $1.1 million in the three months ended October 31, 2019. Interest related to obligations of BHCMC, LLC was $982 in the three months ended October 31, 2020 compared to $1.0 million in the three months ended October 31, 2019.

 

Operations by Segment

 

We have two operating segments, Professional Services and Aerospace Products. The Professional Services segment includes revenue contributions and expenditures associated with casino management services and professional architectural, engineering and management support services. Aerospace Products derives its revenue by designing, engineering, manufacturing, installing, servicing and repairing products for classic and current production aircraft.

 

The following table presents a summary of our operating segment information for the three months ended October 31, 2020 and October 31, 2019:

 

(dollars in thousands)		Three Months Ended October 31, 2020				Percent of Total Revenue				Three Months Ended October 31, 2019				Percent of Total Revenue				Percent Change 2019-2020
Professional Services
Revenue
Boot Hill Casino		$	7,555				99	%		$	8,043				99	%			-6	%
Management/Professional Services			93				1	%			64				1	%			45	%
Revenue			7,648				100	%			8,107				100	%			-6	%
Costs of Professional Services			3,418				45	%			4,006				49	%			-15	%
Expenses			2,714				35	%			2,910				36	%			-7	%
Total costs and expenses			6,132				80	%			6,916				85	%			-11	%
Professional Services operating income (loss) before noncontrolling interest in BHCMC, LLC		$	1,516				20	%		$	1,191				15	%			27	%

 

(dollars in thousands)		Three Months Ended October 31, 2020				Percent of Total Revenue				Three Months Ended October 31, 2019				Percent of Total Revenue				Percent Change 2019-2020
Aerospace Products
Revenue		$	8,324				100	%		$	11,330				100	%			-27	%
Costs of Aerospace Products			6,687				80	%			6,563				58	%			2	%
Expenses			1,466				18	%			1,731				15	%			-15	%
Total costs and expenses			8,153				98	%			8,294				73	%			-2	%
Aerospace Products operating income		$	171				2	%		$	3,036				27	%			-94	%

 

 

Professional Services

 

●

Revenue from Professional Services decreased 6% for the three months ended October 31, 2020 to $7.6 million compared to $8.1 million for the three months ended October 31, 2019. The decrease resulted from fewer Boot Hill Casino & Resort patron visits due to COVID-19. In the three months ended October 31, 2020 Boot Hill Casino received gross receipts for the State of Kansas of $9.8 million compared to $10.2 million for the three months ended October 31, 2019. Mandated fees, taxes and distributions reduced gross receipts by $3.0 million resulting in gaming revenue of $6.8 million for the three months ended October 31, 2020, compared to a reduction to gross receipts of $3.2 million resulting in gaming revenue of $7.0 million for the three months ended October 31, 2019.  Non-gaming revenue at Boot Hill Casino decreased to $784 for the three months ended October 31, 2020, compared to $1.1 million for the three months ended October 31, 2019. The remaining management and Professional Services revenue includes professional management services in the gaming industry, and licensed architectural services.  Professional Services revenue excluding Boot Hill Casino increased 45% to $93 for the three months ended October 31, 2020, compared to $64 for the three months ended October 31, 2019.

 

●

Costs of Professional Services decreased 15% in the three months ended October 31, 2020 to $3.4 million compared to $4.0 million in the three months ended October 31, 2019. Costs were 45% of segment total revenue in the three months ended October 31, 2020, as compared to 49% of segment total revenue in the three months ended October 31, 2019.

  

●

Expenses decreased 7% in the three months ended October 31, 2020 to $2.7 million compared to $2.9 million in the three months ended October 31, 2019. Expenses were 35% of segment total revenue in the three months ended October 31, 2020, as compared to 36% of segment total revenue in the three months ended October 31, 2019.

 

Aerospace Products

 

●

Revenue decreased 27% to $8.3 million in the three months ended October 31, 2020, compared to $11.3 million in the three months ended October 31, 2019. The decrease in revenue is primarily due to a decrease in avionics business of $3.2 million and an increase in aircraft modification business of $162. We have invested in the development of several STCs. These STCs are state of the art avionics that we market both domestically and internationally.

 

●

Costs of Aerospace Products increased 2% in the three months ended October 31, 2020 to $6.7 million compared to $6.6 million for the three months ended October 31, 2019.  Costs were 80% of segment total revenue in the three months ended October 31, 2020, as compared to 58% of segment total revenue in the three months ended October 31, 2019.

 

●

Expenses decreased 15% in the three months ended October 31, 2020 to $1.5 million compared to $1.7 million in the three months ended October 31, 2019.  Expenses were 18% of segment total revenue in the three months ended October 31, 2020, as compared to 15% of segment total revenue in the three months ended October 31, 2019.

 

Employees

 

Other than persons employed by our gaming subsidiaries there were 111 full time and 5 part time employees on October 31, 2020, compared to 103 full time and 6 part time employees on October 31, 2019. As of December 4, 2020, staffing is 110 full time and 5 part time employees. Our staffing at Boot Hill Casino & Resort on October 31, 2020 was 166 full time and 66 part time employees compared to 197 full time and 64 part time employees on October 31, 2019. At December 4, 2020 there are 162 full time and 69 part time employees. None of the employees are subject to any collective bargaining agreements.

 

Liquidity and Capital Resources

  

We believe that our current banks will provide the necessary capital for our business operations. However, we continue to maintain contact with other banks that have an interest in funding our working capital needs to continue our growth in operations in fiscal 2021 and beyond.

  

The ownership structure of BHCMC, LLC is now:

  

		Members of
		Board of		Equity		Income
Membership Interest		Managers		Ownership		(Loss) Sharing
Class A		3		20%		40%
Class B		4		80%		60%

  

Our wholly owned subsidiary, Butler National Service Corporation continues friendly discussions with the other member of BHCMC, LLC to explore the possible acquisition by Butler National Service Corporation of the other member's 20% equity interest in BHCMC, LLC.   If and when a definitive agreement is reached, such definitive agreement and a press release concerning the acquisition will be issued to describe the terms of the agreement and the intentions of the members.   We have not set a definitive timetable for our discussions and there can be no assurances that the process will result in any transaction being announced or completed.  At present there is no disagreement between the members of BHCMC, LLC.   We do not plan to disclose or comment on developments until further disclosure is deemed appropriate.

  

BHCMC, LLC, rents the casino building under the terms of a 25 year lease from BHC Development L.C. ("BHCD"). Butler National Service Corporation continues friendly discussions with BHC Development L.C. to explore the possible acquisition by Butler National Service Corporation of the casino building and related land. If and when a definitive agreement is reached, such definitive agreement and press release concerning the acquisition will be issued to describe the terms of the agreement and the intentions of the members. Butler National Corporation, its management, and its subsidiaries have no ownership interest in BHCI or BHCD.

 

 
Analysis and Discussion of Cash Flow

 

During the six months ended October 31, 2020 our cash position increased by $611. Net income was $48 for the six months ended October 31, 2020. Cash flows provided by operating activities was $4.0 million for the six months ended October 31, 2020. Non-cash activities consisting of depreciation and amortization provided $3.3 million, while deferred compensation provided $300. Customer deposits increased our cash position by $1.8 million. We reduced our lease liability by $559. Inventories decreased our cash position by $893. Accounts receivable increased our cash position by $514. Gaming facility mandated payments increased our cash position by $64. Prepaid expenses and other assets decreased our cash by $456. An increase in accounts payable, a decrease in accrued expenses, and an increase in other current liabilities increased our cash by $215. Income taxes decreased our cash position by $271.

  

Cash used in investing activities was $3.4 million for the six months ended October 31, 2020. We invested $229 to purchase aircraft, $1.5 million towards STCs, and $1.7 million on equipment and furnishings.

  

Cash provided by financing activities was $12 for the six months ended October 31, 2020. We increased our debt by $2.0 million. We made repayments on our debt of $1.8 million. We purchased company stock of $185. The stock was acquired and placed in treasury.

 

Critical Accounting Policies and Estimates

  

We believe that there are several accounting policies that are critical to understanding our historical and future performance, as these policies affect the reported amount of revenue and other significant areas involving management judgments and estimates. These significant accounting policies relate to revenue recognition, the use of estimates, long-lived assets, and Supplemental Type Certificates. These policies and our procedures related to these policies are described in detail below and under specific areas within this "Management's Discussion and Analysis of Financial Condition and Results of Operations."

 

Revenue Recognition: See footnote 3 to the condensed consolidated financial statements.

 

Lease Right-to-Use: See footnote 11 to the condensed consolidated financial statements.

 

Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Future events and their effects cannot be determined with certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results could differ from those estimates, and any such differences may be material to our financial statements. Significant estimates include assumptions about percentage-of-completion, collection of accounts receivable, inventory obsolescence, the valuation of long-lived assets, including the STC’s, valuation for deferred tax assets and useful life of fixed and other long-term assets.

  

Long-lived Assets: The Company accounts for its long-lived assets in accordance with ASC Topic 360-10, "Accounting for the Impairment or Disposal of Long-Lived Assets." ASC Topic 360-10 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the historical cost carrying value of an asset may no longer be appropriate. The Company assesses recoverability of the carrying value of an asset by estimating the future net cash flows expected to result from the asset, including eventual disposition. If the future net cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset's carrying value and fair value or disposable value.

  

Supplemental Type Certificates: Supplemental Type Certificates (STCs) are authorizations granted by the Federal Aviation Administration (FAA) for specific modification of a certain aircraft. The STC authorizes us to perform modifications, installations, and assemblies on applicable customer-owned aircraft. Costs incurred to obtain STCs are capitalized and subsequently amortized over a seven year life. The legal life of an STC is indefinite.

    

Changing Prices and Inflation

  

We have experienced upward pressure from inflation in fiscal year 2021. From fiscal year 2020 to fiscal year 2021 most of the increases we experienced were in material costs. This additional cost may not be transferable to our customers resulting in lower income in the future. We anticipate fuel costs and possibly interest rates to rise in fiscal 2021 and 2022.

  

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements.

 

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are a smaller reporting company as defined by Rule 12b-2 under the Securities Exchange Act of 1934 and are not required to provide the information required under this item.

  

 

Item 4.  CONTROLS AND PROCEDURES

  

We maintain a set of disclosure controls and procedures designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms. Our principal executive and financial officers have evaluated our disclosure controls and procedures as of the end of the period covered by this report on Form 10-Q and have determined that such disclosure controls and procedures are effective, based on criteria in the Internal Control-Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO").

  

Evaluation of disclosure controls and procedures: Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Exchange Act are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosures.

  

In connection with the preparation of this Form 10-Q, our Chief Executive Officer and our Chief Financial Officer conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of October 31, 2020. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of October 31, 2020.

  

Internal Control Over Financial Reporting

 

Limitations on Controls

 

Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

  

Changes in Internal Control Over Financial Reporting: In our opinion there were no changes in the Company's internal control over financial reporting during the six months ended October 31, 2020 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

    

   

PART II.  OTHER INFORMATION

 

Item 1.			LEGAL PROCEEDINGS.
			As of October 31, 2020, there are no significant known legal proceedings pending against us. We consider all such unknown proceedings, if any, to be ordinary litigation incident to the character of the business. We believe that the resolution of any claims will not, individually or in the aggregate, have a material adverse effect on the financial position, results of operations, or liquidity of the Company.
Item 1A.			RISK FACTORS.
			There are no other material changes to the risk factors disclosed under Item 1A of our Form 10-K for the fiscal year ended April 30, 2020.
Item 2.			UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
			The table below provides information with respect to common stock purchases by the Company during the second quarter of fiscal 2021.

 

Period		Total Number of Shares Purchased (a)				Average Price Paid per Share				Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs				Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs
August 1, 2020 - August 31, 2020			-			$	-				-			$	2,911,000
September 1, 2020 - September 30, 2020			112,120			$	0.50				112,120			$	2,891,000
October 1, 2020 - October 31, 2020			40,795			$	0.50				40,795			$	2,835,000
Total			152,915			$	0.50				152,915

 

(a) Our Board of Directors authorized the repurchase of shares of Butler National common stock in the open market or otherwise, at an aggregate purchase price of $4,000,000. The timing and amount of any share repurchases will be determined by Butler National's management based on market conditions and other factors. The program is currently authorized through May 1, 2021.

 

Item 3.		DEFAULTS UPON SENIOR SECURITIES.
		None.
Item 4.		MINE SAFETY DISCLOSURES.
		Not applicable.
Item 5.		OTHER INFORMATION.
		None.
Item 6.		EXHIBITS.
	3.1	Articles of Incorporation, as amended and restated are incorporated by reference to Exhibit 3.1 of our Form DEF 14A filed on December 26, 2001.
	3.2	Bylaws, as amended, are incorporated by reference to Exhibit 3.2 of our Form 10-Q filed on March 14, 2013.
	4.1	Rights Agreement, dated August 2, 2011, by and between Butler National Corporation and UMB Bank, N.A., as Rights Agent, incorporated by reference to Exhibit 4.1 of our 10-Q filed on December 13, 2016.
	31.1	Certificate of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a).
	31.2	Certificate of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a).
	32.1	Certifications of Chief Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32.2	Certifications of Chief Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	101	The following financial information from the Company's Quarterly Report on Form 10-Q for the quarter ended October 31, 2020, formatted in XBRL (Extensible Business Reporting Language) includes: (i) Condensed Consolidated Balance Sheets as of October 31, 2020 and April 30, 2020, (ii) Condensed Consolidated Statements of Operations for the three and six months ended October 31, 2020 and 2019, (iii) Condensed Consolidated Statements of Stockholders’ Equity for the six months ended October 31, 2020 and 2019, (iv) Condensed Consolidated Statements of Cash Flows for the six months ended October 31, 2020 and 2019, and (v) the Notes to Consolidated Financial Statements, with detail tagging.

    

 

SIGNATURES

  

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

  

 

	BUTLER NATIONAL CORPORATION
	(Registrant)
December 11, 2020	/s/ Clark D. Stewart
Date	Clark D. Stewart
	(President and Chief Executive Officer)
December 11, 2020	/s/ Tad M. McMahon
Date	Tad M. McMahon
	(Chief Financial Officer)

     

 

Exhibit Index

  

Exhibit Number	Description of Exhibit
3.1	Articles of Incorporation, as amended and restated are incorporated by reference to Exhibit 3.1 of our Form DEF 14A filed on December 26, 2001.
3.2	Bylaws, as amended, are incorporated by reference to Exhibit 3.2 of our Form 10-Q filed on March 14, 2013.
4.1	Rights Agreement, dated August 2, 2011, by and between Butler National Corporation and UMB Bank, N.A., as Rights Agent, incorporated by reference to Exhibit 4.1 of our 10-Q filed on December 13, 2016.
31.1	Certificate of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a).
31.2	Certificate of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a).
32.1	Certifications of Chief Executive Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certifications of Chief Financial Officer furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	The following financial information from the Company's Quarterly Report on Form 10-Q for the quarter ended October 31, 2020, formatted in XBRL (Extensible Business Reporting Language) includes: (i) Condensed Consolidated Balance Sheets as of October 31, 2020 and April 30, 2020, (ii) Condensed Consolidated Statements of Operations for the three and six months ended October 31, 2020 and 2019, (iii) Condensed Consolidated Statements of Stockholders’ Equity for the six months ended October 31, 2020 and 2019, (iv) Condensed Consolidated Statements of Cash Flows for the six months ended October 31, 2020 and 2019, and (v) the Notes to Consolidated Financial Statements, with detail tagging.